Strong GDP no bar to rate cut

The way the foreign exchange market reacted, you'd be forgiven for thinking the latest economic growth figures make an interest rate cut less likely.

But the market needs to look again.

On Wednesday afternoon, the Aussie dollar was trading around 72.75 US cents, nearly a cent higher than it was before foreign trade data on Tuesday signalled a strong gross domestic product figure, subsequently confirmed by the Australian Bureau of Statistics on Wednesday.

GDP rose 1.1 per cent in the March quarter and 3.1 per cent through the year, in each case the fastest for at least three years.

And that, so the argument goes, gives the Reserve Bank less reason to cut interest rates again to boost growth and get the inflation rate - 1.3 per cent at last measure - back into the target band of two to three per cent.

The implication that interest rates would be higher than they otherwise might have been gave traders a green light to buy the Australian dollar.

And so up it went.

But the argument has a weak link - the slack labour market, the main reason inflation has slowed.

Unemployment is currently 5.7 per cent, right in line with the average of the past five years and clearly too high to drive wages growth consistent with the inflation target.

Any job hunter or employee looking for a pay rise will tell you that.

It's why the latest figures from the bureau show wages growth at a record low.

And that's feeding into the cost of production.

Unit labour costs - the cost of the labour used to produce a given quantity of output - fell by 0.5 per cent in the March quarter, to be up by just 0.4 per cent from four years earlier, according to the national accounts.

No wonder inflation is wallowing beneath the RBA's target range.

The question for the RBA is whether the pickup in GDP growth will change that.

The answer is that it probably won't.

The GDP figures, while strong, give no reason to expect the strong employment growth needed to spark faster wage rises.

A third of the GDP growth over the past year was accounted for by mining.

But mining added only 5,000 of the 237,000 rise in employment over the year - just one fiftieth of the total.

With the resource sector producing lots of coal, iron ore and LNG, but precious few jobs, the argument that the strong GDP number lets the RBA off the hook is flimsy.

Whether more rate cuts will help, or it's time to turn to fiscal stimulus, is another matter.

But there's nothing in the national accounts to suggest the slow employment growth/low inflation problem has gone away, or will go way anytime soon.